Monday August 10 Housing and Economic stories

TOP STORIES:

UBS's legal reserves dip; Puerto Rico probe widened - (www.reuters.com) U.S. authorities have widened a probe into bond funds sold by UBS's Puerto Rico arm, the Swiss bank announced on Tuesday, alongside figures showing it has used up some of the money it set aside to cover legal costs and regulatory fines. Zurich-based UBS's legal reserves were disclosed in a ten-page section on pending litigation in its second-quarter report, a day after financial results. They stood at 2.37 billion Swiss francs ($2.46 billion) at the end of June, down from 2.73 billion francs the previous quarter. The reserves fell after UBS in May became one of four major banks to plead guilty to trying to manipulate foreign exchange rates in the $5-trillion-a-day currency market, paying $545 million in combined fines. Other risks remain, however, including claims the bank misrepresented mortgage-backed bonds during the U.S. housing bubble, a French investigation into tax dealings and wealthy clients, and back taxes due to Brazil relating to when the Swiss lender owned an investment bank in the country.

Brazil Port Boom-to-Bust Shows Snapshot of an Almost Superpower - (www.bloomberg.com) Santos Port has always been known as Brazil’s gateway to the world. Now, it’s also a window into what went wrong in Latin America’s biggest economy. Exports from Santos have tumbled as demand from China sags. Companies betting on a boon as massive offshore oil finds were developed are now scaling back after Petroleo Brasileiro SA said it will cut investments by a third. And real-estate prices are falling as entire buildings stand vacant. Nowhere, perhaps, are Brazil’s unfulfilled promises as an almost superpower more apparent than Santos, Latin America’s busiest port. About an hour outside of Sao Paulo, Santos benefited from the dual boon of the commodities supercycle and the government spending spree it afforded. Now, it’s feeling the double blow of a corruption scandal at Petrobras and Brazil’s worst recession in a quarter century. “There’s a feeling that Santos, just like Brazil, has missed its opportunity and the golden years have passed us by,” said Karla Simionato, coordinator of economic science at the Catholic University of Santos.

Junk Bondholders Weigh Emerging-Market Exit From Benchmark Index - (www.bloomberg.com) Bank of America Corp. will decide this week whether to remove emerging-market companies from its $2.2 trillion global high-yield index. The lender asked junk-bond investors to vote on the matter as part of an annual review of its benchmarks after a slew of downgrades to Brazilian and Russian companies boosted their share of the index. Bank of America said it will implement any changes at the end of September. The decision pits investors who want the measure to better reflect the corporate high-yield market against those seeking higher yields associated with extra political risk. A removal of emerging-market companies, which accounted for 18 percent of the index at the end of March, may trigger price swings if bondholders are forced to sell those securities and raise funding costs for excluded companies.

Shale "Revolver Raids" To Resume In October When "Rubber Meets The Road" For HY Energy - (www.zerohedge.com)  Now that the defaults and bankruptcies have begun, and now that David Einhorn has jumped on the bandwagon (coining a new word in the process), it’s time for banks to start taking a hard look at just how bad the fallout will be once hedges start rolling off and more weak hands are shaken out of the HY oil & gas space. As we discussed at the beginning of last month, the “revolver raids” have already begun for some heavily indebted US shale companies who were set to see their credit lines cut after banks performed their bi-annual review in April, which is based on where crude has traded over the preceding 12 months. Those credit lines will be assessed again in October and according to a UBS survey of the banks who have helped finance the oil & gas industry, the outlook is not good, with nearly two-thirds of respondents indicating that loan quality is likely to deteriorate. No one said they expected conditions to improve and more than 80% of banks reported tightening credit lines to oil & gas companies. For its part, UBS believes the “rubber will meet the road” for the HY energy in H2 as energy prices likely will not be high enough to support “lower quality” players. 

Hedge funds tell Puerto Rico: lay off teachers and close schools to pay us back - (www.theguardian.com)  Billionaire hedge fund managers have called on Puerto Rico to lay off teachers and close schools so that the island can pay them back the billions it owes. The hedge funds called for Puerto Rico to avoid financial default – and repay its debts – by collecting more taxes, selling $4bn worth of public buildings and drastically cutting public spending, particularly on education. The group of 34 hedge funds hired former International Monetary Fund (IMF) economists to come up with a solution to Puerto Rico’s debt crisis after the island’s governor declared its $72bn debt “unpayable” – paving the way for bankruptcy. The funds are “distressed debt” specialists, also known as vulture funds, and several have also sought to make money out of crises in Greece and Argentina, the collapse of Lehman Brothers and the near collapse of Co-op Bank in the UK.

OTHER STORIES:

U.S. consumer confidence drops in July - (www.reuters.com)
U.S. Homeownership Rate Falls to the Lowest Level Since the 1960s - (www.bloomberg.com)
China Stocks Extend Rout as Traders Lose Faith in State Support - (www.bloomberg.com)
Global stocks rebound, ignoring decline in Chinese markets - (www.reuters.com)

Analyst Who Predicted Bottom for Shanghai Stocks Sees Further 14% Plunge - (www.bloomberg.com)
Behind China Market’s Latest Collapse: a Government Retreat - (online.wsj.com)
China shares sink again as Beijing scrambles to calm markets - (www.reuters.com)
With Banks Pinched by Rescues, China's Central Bank Aids State Allies - (www.bloomberg.com)
China’s Yuan Pushes Deeper Into Global Financial System - (online.wsj.com)